Gold Fields and Southwest Set to Soar

02/26/2007 12:00 am EST

Focus:

Richard Band

Editor, Profitable Investing

Richard Band of Profitable Investing finds two very different stocks he thinks can show strong gains-a gold mining company and an airline. For his explanation, read on.

Featured ticker symbols: GFI, LUV

Based in South Africa, Gold Fields Ltd. (NYSE: GFI) is the world's third-largest gold producer, with mines in not only its home country but also Ghana, Australia and Venezuela, as well as a developing mine in Brazil.

The recent acquisition of South Deep, a leading South African mine complex, boosts Gold Fields' ore reserves to 23 years' worth of annual production-the longest reserve life of any major mining company in the world.

This conservative organization deplores debt. When the South Deep takeover required some borrowing in 2006, Gold Fields promptly issued stock to pay down the loans. As a result of the extra stock floating around, the share price has slipped-temporarily, I believe-below its normal trading range.

Over the next three to five years, I predict that Gold Fields will grow its earnings faster than the typical gold miner, in an environment (falling dollar, rising bullion price) that should favor the gold-mining industry in general. Political and economic conditions in South Africa have improved markedly, another plus. Its current yield is 1.4%.

Gold has been in a powerful up trend since the beginning of the decade. Therefore, the odds favor a breakout to the upside. If gold were to push through the $700 mark, and then $750 and beyond, mining shares like Gold Fields would skyrocket. My 30% projected gain in the stock over the next 12 months assumes that the Midas metal will trade between $600 and $700. A breakout well above $700 would prompt me to raise my estimate.

Who hasn't heard of Southwest Airlines (NYSE: LUV) ? It's far and away the best-managed airline in America, profitable 34 years in a row. A constant innovator, Southwest maintains a low-debt balance sheet and a motivated, enthusiastic staff-assets that enable the company to drive costs down.

The stock ought to be higher. However, Wall Street frets that several of Southwest's rivals, having recently shed a pile of debt in bankruptcy, might launch a fare war. Anything is possible, I suppose, but I doubt the old-line carriers will put much of a dent in Southwest's market share. Southwest's non-union workforce gives it too much of an advantage, in both cost and flexibility. Southwest pays a trifling dividend, but the company bought back $800 million of stock last year.

So, buy GFI at $16.75 or less and LUV at $14.80 or less. I project a 50% total return for both GFI and LUV within two to three years, and a double by 2012.

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